Market Equilibrium

Where: Qd is the quantity demanded; Qs is the quantity supplied; P is the price.

a = y intercept, x intercept

Example #1

Quantity Supplied Quantity Demanded

P Q P Q
0 0 10 0
2 4 8 4

A. Solve the slope of the demand and supply curves

∆𝑃 𝑃2 − 𝑃1 2−0 2
𝑚𝑠 = = = = 4 = 0.5
∆𝑄𝑠 𝑄𝑠2 − 𝑄𝑠1 4−0

∆𝑃 𝑃2 − 𝑃1 8−10 −2
𝑚𝑑 = ∆𝑄 = = = = /−0.5/= 0.5
𝑑 𝑄𝑑2 − 𝑄𝑑1 4−0 4

B. Substitute the values of the slopes and the intercepts

P = a + ms Qs  P = 0 + 0.5Qs  P = 0.5Qs

P = a – md Qd  P = 10 – 0.5Qd

C. Solve for Q (Qd = Qs)

10 – 0.5Q = 0.5Q
10 = 0.5 + 0.5
10 = 1
Q = 10

D. Solve for P (substitute values in either demand function or supply function)

P = 10 – 0.5(10) P = 0.5(10)
= 10 – 5 =5
=5

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Example #2

Quantity Supplied Quantity Demanded

P Q P Q
2 0 10 0
4 20 8 4

A. Solve the slope of the demand and supply curves

∆𝑃 𝑃2 − 𝑃1 4−2 2 1
𝑚𝑠 = = = = 20 = 10 = 0.1
∆𝑄𝑠 𝑄𝑠2 − 𝑄𝑠1 20−0

∆𝑃 𝑃2 − 𝑃1 8−10 −2
𝑚𝑑 = = = = = /−0.1/= 0.1
∆𝑄𝑑 𝑄𝑑2 − 𝑄𝑑1 20−0 20

B. Substitute the values of the slopes and the intercepts

P = a + ms Qs  P = 2 + 0.1Qs

P = a – md Qd  P = 10 – 0.1Qd

C. Solve for Q (Qd = Qs)

10 – 0.1Q = 2 + 0.1Q
0.1 +0.1 = 10 – 2
0.2 = 8
0.2 8
=
0.2 0.2
Q = 40

D. Solve for P (substitute values in either demand function or supply function)

P = 10 - 0.1(40) P = 2 + 0.1(40)
=6 =6

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Disequilibrium – government intervention (price control)

Externalities – unwanted results from market failures (e.g. coding)

Surplus – price of good above equilibrium price

Shortage – price of good below equilibrium price

Example#1

Quantity Supplied Quantity Demanded

P Q P Q
0 0 5 0
1 5 4 5

A. Solve the slope of the demand and supply curves

1
𝑚𝑠 = = 0.2
5

−1
𝑚𝑑 = = /−0.2/= 0.2
5

B. Substitute the values of the slopes and the intercepts

P = a + ms Qs  P = 0 + 0.2Qs  P = 0.2Qs

P = a – md Qd  P = 5 – 0.2Qd

C. Solve for Q (Qd = Qs)

0.2Q = 5 – 0.2Q
0.2 + 0.2 = 5
0.4 5
=
0.4 0.4
Q = 12.5

D. Solve for P (substitute values in either demand function or supply function)

P = 0.2(12.5) P = 5 - 0.2(12.5)
= 2.5 = 2.5

Example#3

4 = 0.2Qs 4 = 5 – 0.5Qd
0.2𝑄𝑠 =4 0.2𝑄𝑠 =1
0.2𝑄𝑠 0.2𝑄𝑠
Qs = 20 Qd = 5

E. Surplus/Shortage

Price Qs Qd Qs - Qd
2.5 12.5 12.5 12.5 – 12.5 0
4 20 5 20 – 5 +15
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Example#3

Quantity Supplied Quantity Demanded

P Q P Q
0 0 10 0
2 4 8 4

A. Solve the slope of the demand and supply curves

2
𝑚𝑠 = = 0.5
4

−2
𝑚𝑑 = = /−0.5/= 0.5
4

B. Substitute the values of the slopes and the intercepts

P = a + ms Qs  P = 0 + 0.5Qs  P = 0.5Qs

P = a – md Qd  P = 10 – 0.5Qd

C. Solve for Q (Qd = Qs)

0.5Q = 10 – 0.5Q
0.5 + 0.5 = 10
1 = 10
Q = 10

D. Solve for P (substitute values in either demand function or supply function)

P = 0.5(10) P = 10 - 0.5(10)
=5 =5

Example#4

8 = 0.5Qs 8 = 10 – 0.5Qd
0.5𝑄𝑠 =8 0.5𝑄𝑠 =2
0.5𝑄𝑠 0.5𝑄𝑠
Qs = 16 Qd = 4

Example#5

1 = 0.5Qs 1 = 10 – 0.5Qd
0.5𝑄𝑠 =1 0.5𝑄𝑠 =9
0.5𝑄𝑠 0.5𝑄𝑠
Qs = 2 Qd = 18

Example#6

12 = 0.5Qs 12 = 10 – 0.5Qd
0.5𝑄𝑠 =12 0.5𝑄𝑠 =(−2)
0.5𝑄𝑠 0.5𝑄𝑠
Qs = 24 Qd = (-4)

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E. Surplus/Shortage

Price Qs Qd Qs - Qd
5 10 10 10 – 10 0
8 16 4 16 – 4 +12
1 2 18 2 – 18 -16
12 24 -4 24 – (-4) 28

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Example#01

Quantity Supplied Quantity Demanded

P Q P Q
- - 40 0
- - 30 10

A.
P = 30
P = 40 – Qd

B. Solve for Q
30 = 40 – Qd
Qd = 40 – 30
Qd = 10

C. Solve for P
P = 40 – 10
P = 30

Example#02

Quantity Supplied Quantity Demanded

P Q P Q
10 0 - -
20 20 - -

A.
Qd = 80
10
= 0.5𝑚𝑠
20

P = 10 + 0.5Qs
0.5𝑚𝑠 =𝑃−10
0.5𝑚𝑠
2P – 20 = Qs or Qs = 2P -20

B. Solve for P
2P – 20 = 80
2P = 80 + 20
2𝑃=100
2𝑃
P = 50

C. Solve for Q
Qs = 2(50) – 20
Qs = 100 -20
Qs = 80

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Example#03

Quantity Supplied Quantity Demanded

P Q P Q
- - 25 0
- - 20 5

A.
Qs = 20
−5
= /−1/= 1
5

B. Solve for P
P = 25 –Qd
Qd = 25 –P
20 = 25 –P
P = 25 – 20
P=5

C. Solve for Q
Qd = 25 – 5
Qd = 20

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Illustrations

Example#01

Example#02

Example#03

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